Ukraine wants allies to seize Russian assets to fund its reconstruction. How would that work?

Ukraine is working with its allies to seize Russian assets held overseas and use them to help rebuild the war-torn country, says a top economic adviser to Ukrainian President Volodymyr Zelensky.

In an interview with Bloomberg on Monday, Oleg Ustenko said that Ukraine was working with other countries to launch a “mass attack on all major assets,” and specifically highlighted Russia’s foreign reserves and oil tankers as significant overseas assets.

An asset seizure would be a major escalation of economic pressure on Russia just as earlier sanctions appear to be losing their bite. With billions of dollars in Russian assets already frozen, Western countries could make good on that threat—if they can navigate the legal complications of doing so. 

The World Bank predicts Ukraine’s economy may contract by as much as 45% in the aftermath of the Russian invasion. Ustenko estimates Russia’s invasion has caused almost $1 trillion in damage to Ukraine—which, if true, would be an amount 6.5 times the size of Ukraine’s entire GDP in 2020.

Ustenko argues that seizing assets and transferring them to Ukraine could be used to help alleviate the cost of the country’s rebuilding—and allow Ukraine to fund its own defense against further Russian attacks.

As of September 2021, overseas Russian assets—including both government reserves and foreign direct investment from the private sector—officially totaled $1.62 trillion, according to the Brookings Institution, citing data from the International Money Fund. The dollar value of assets already frozen by Ukraine’s allies numbers into the billions, if not hundreds of billions, of dollars. 

The U.S., the EU, and Japan collectively have frozen about $300 billion of Russia’s foreign currency reserves held in overseas banks.

Countries have also frozen billions in assets from sanctioned individuals. Switzerland—long a home for hidden Russian wealth—announced on April 7 that it had frozen about $8 billion in Russian assets in the country.

Ukraine’s call to ratchet up economic pressure on Russia comes amid a global debate over the current sanctions regime’s effectiveness. The ruble has recovered all of its losses since Russia invaded Ukraine, owing to capital controls and continued demand for Russian energy exports. Energy revenues are proving to be a resilient lifeline for Moscow, with Bloomberg predicting Russian energy would provide $321 billion in revenue this year, a 33% increase from the year before. 

Some critics of Russia beyond Ukraine have called for seizing Russian assets to support both Ukrainian refugees and Ukraine’s reconstruction, including the hundreds of billions of dollars in frozen Russian currency reserves. The Atlantic Council’s Adrian Karatnycky called the trapped funds “a crucial asset that can be used to protect Ukraine and its sovereignty” in a Sunday op-ed for the Wall Street Journal.

Yet an outright seizure of assets would be legally complicated. Freezing assets wouldn’t affect ownership—it would merely halt any transactions using those assets. For example, U.K. sanctions against Russian oligarch Roman Abramovich did not affect his ownership of Chelsea Football Club, yet complicated his ability sell it, as any sale could be a sanctions-violating transfer of funds.

Any attempt to take ownership of a Russian asset would need to go through the court system. For example, on April 4, the U.S. seized a 255-foot yacht belonging to Russian oligarch Viktor Vekselberg while it was docked in Spain’s Balearic Islands. But to do so, the U.S. Department of Justice needed to get a seizure warrant from a U.S. court after the DOJ alleged that Vekselberg had committed financial crimes, including sanctions evasion. The U.S. then had to get the cooperation of Spanish authorities to seize the superyacht while it was docked in Mallorca.

U.S. officials now say they will start the forfeiture process for Vekselberg’s yacht which, if successful, would give ownership to the U.S. government—who could then auction it off and use the proceeds to fund Ukraine’s reconstruction.

But lawyers told Fortune that any government attempting to take ownership of an oligarch’s ship could face a long legal battle, as authorities would first need to prove that the boat was tied to a criminal offense, then wait for the case to make its way through the courts. Authorities would need to pay for upkeep as the case was in progress—just in case they lost the case, and had to return the yacht to its original Russian owner.

Both the U.S. House and Senate have proposed legislation that would grant U.S. President Joe Biden the authority to more easily seize Russian assets held in the U.S. However, the American Civil Liberties Union helped to kill a recent proposal—which would have allowed the president to seize frozen assets worth more than $5 million and use the proceeds to assist Ukraine.

“This bill was so unconstitutional that it raised the prospect that a sanctioned Russian national could win in an American court, which likely would have struck down both the statute and the sanction as being unconstitutional,” Christopher Anders, the ACLU’s federal policy director, told the Washington Post.

The prospect of costly and protracted legal battles may be enough to discourage anyone—Ukrainian or otherwise—from trying to make a move on Russian assets.

Yet a court battle might pay off. In 2021, a group representing the families of 9/11 victims won a court order to seize part of the Afghan central bank’s reserves, which had been frozen after the Taliban takeover of Kabul. President Biden later decided to split the frozen reserves in half, with one part going to the victims’ group, and the other going toward humanitarian assistance for Afghanistan.

The Afghan precedent shows that Washington “is willing to take fairly dramatic steps…when it doesn’t like the government of a foreign state,” noted Mark Weidemaier, a professor of law at the University of North Carolina, back in March

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